Most investors have a simple aim: to grow their wealth over the long term. There will always be "hot" markets in which to invest. Similarly, there will be areas to avoid. Trying to second guess which is fraught with danger.
It is also not uncommon for investors to suffer from information overload. This can make investment decisions challenging. The media bombards us with endless news on sovereign debt, interest rates, inflation and political issues. Investors can become too focused on the short term or, feeling overwhelmed, put investment decisions on the back burner.
Big picture events can drive a market's short-term return, but I have long believed finding the right fund managers is key to long-term success. There are thousands of funds, but only a handful of genuinely talented fund managers. Finding them is not easy, but Chris Hutchinson and John McClure, of Unicorn Asset Management, stand out.
The Unicorn team is small, but focused, concentrating on long-term, low turnover investing. The "boutique" structure of the business helps in this regard as the managers are less constrained by benchmarks than peers at larger firms. The fund managers also part-own the business, providing an extra incentive to perform.
Hutchinson and McClure are involved with a number of Unicorn's funds, but their talents are brought together in the Unicorn Outstanding British Companies Fund. This aims to do exactly what it says on the tin. The managers seek the best British companies from across the UK market. In addition to larger firms, they have the flexibility to invest in higher-risk smaller and medium-sized companies, as well as those listed on the junior AIM market.
The managers believe a number of specific criteria combine to make an outstanding company. They look for ones that are easy to understand, hold leading positions in growing markets and are able to sustain their competitive advantage. Earnings must be predictable and the company must be able to generate high returns from the capital invested in the business. They believe this can lead to strong cash generation and a consistent record of operating performance.
Company management is also important. They look for those with shareholder interests at heart, willing to reinvest cash sensibly to grow the business or pay it out as dividends, rather than those adding too much debt or embarking on aggressive acquisitions. The fund has historically held a high weighting in industrial companies as the managers believe this sector is home to many world-renowned and quality businesses. They hold a range of industrial and engineering companies, from FTSE 100-listed Rolls-Royce to Spirax Sarco, which is listed on the FTSE 250, and AIM-listed Abcam.
In contrast, the managers tend to avoid biotechnology and junior mining and exploration companies as they have less predictable revenues, are harder to understand and are often unprofitable. They also tend to avoid utilities as they have less growth potential and little or no pricing power, given the high levels of regulation they are subject to. Once a company is in the portfolio, the managers aim to hold it for at least five years. They maintain a one in, one out policy and aim to keep trading to a minimum. A company will tend to be sold if it experiences a profit warning and the managers keep a "watch list" of potential holdings, meaning they can react quickly if necessary.
It has not been an easy time for Unicorn over the past few years and assets under management hit a low point around the time of the financial crisis. Hutchinson and McClure have since been instrumental in rebuilding the business, cutting costs, strengthening the team and letting the performance of the funds do the talking.
The Outstanding British Companies fund has grown by 98 per cent over the past five years, compared with 44 per cent for the FTSE All-Share Index and 41 per cent for the average fund in the IMA UK All Companies Sector. The fund remains small and nimble at just £19m, but there is plenty of capacity for growth. With a focused, well-motivated team and a robust investment approach, this could be an ideal fund to tuck away for the long term and steal a march on fellow investors.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent